How the global economy became more equal – thanks to capitalism

Paul Ormerod is an economist at Volterra Partners LLP, a visiting professor in the Department of Computer Science at UCL, and author of Positive Linking: How Networks can Revolutionise the World.

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Paul Ormerod

METROPOLITAN liberals love to be able to criticise Western society. Recently, their lives have been brightened by the extensive discussion on the rise in inequality since the 1970s, especially in the Anglo-Saxon economies. There is a danger that this essentially anti-capitalist narrative will come to dominate the media, paving the way for increased regulation and the sorts of failed statist interventions that were a consistent theme in British political economy for nearly four decades after the Second World War.

Yet on a global scale, in terms of the degree of inequality which exists between nations, the past 50 years have seen a huge movement towards a much more equal world. And it is precisely the institutional structure of capitalism – of companies motivated, at least in part, by profit, operating in a market-oriented system – which has brought this about. This was the system that England introduced to the world in the late eighteenth century with the Industrial Revolution.

Until then, over the whole span of the millennia of organised human society, and in terms of the difference in living standards between regions, the world had been a very egalitarian place. Most people lived for most of the time on the brink of starvation. A widely used summary measure of inequality is the so-called Gini coefficient. In a completely equal society, the Gini coefficient is zero – no inequality – and in a society in which one person has all the income it is 100. So the higher the value, the more unequal the society. For most of human history, the Gini coefficient between regions of the world seems to have been between 10 and 15, a far more equal distribution than currently exists within any individual country.

The dramatic subsequent success of capitalism in certain parts of the world led to a marked widening of the degree of world inequality. Growth did not stand still in, say, Latin America, but it was much faster in Western Europe, North America and Australasia. By the middle of the twentieth century, the world Gini coefficient was just under 50, its peak level. The club of prosperous nations that had formed by 1870 was essentially the same in 1950.

Japan forced its way in, with absolutely spectacular growth in the 1950s and 1960s, closely followed by other East Asian countries such as South Korea and Taiwan. More recently, of course, China and, to some extent, India have adopted capitalist principles of economic organisation and have boomed as a result. In the former Soviet bloc, those countries that oriented themselves towards the West have prospered, while others, like Russia itself, have floundered. Even in Africa, where countries went backwards following independence in the 1960s, there are very encouraging signs of recent progress.

In terms of differences in per capita income levels between countries, the world is now much more equal than it was in 1950, and probably at around the same level that it was in 1850. And it is capitalism which has brought this about.

Paul Ormerod is an economist at Volterra Partners, a visiting professor at the UCL Centre for Decision Making Uncertainty, and author of Positive Linking: How Networks Can Revolutionise the World.